Euro zone August business growth keeps up solid pace

(Reuters) - Euro zone business growth maintained a solid clip in August, driven by the best manufacturing performance in 6-1/2 years despite a strong euro, easily offsetting a mild slowdown in services growth, a key private sector survey showed on Wednesday.

Taken together with a mild pickup in price pressures, the data is likely to support expectations that the European Central Bank will proceed later this year with making plans to scale back its multi-billion euro monthly asset purchases.

The Flash Eurozone Composite Purchasing Managers’ Index (PMI), generally considered a good indicator of overall economic growth, edged up slightly to 55.8 in August from 55.7, beating the median Reuters Poll estimate of 55.5.

The momentum was underpinned by strong manufacturing growth in both of the euro zone’s biggest economies, Germany and France, where manufacturing PMIs surged above even the most optimistic forecasts.

Overall, the latest data suggest 0.5 percent economic growth in the 19-member single currency bloc during July-September, the survey’s compilers said, compared with 0.6 percent in the previous quarter.

That was a slight downgrade from their assessment in July, but higher than the current 0.4 percent consensus among economists from the latest Reuters poll.

“These numbers will not change the ECB’s fundamental assessments of the economy,” noted Holger Sandte, chief European analyst at Nordea Markets. “The recovery is robust – good but old news. At the same time, core inflation is low and will most likely continue to pick up only very gradually.”

A worker moves a new Audi R8 car body in the automotive welding and assembly lines hall of the German car manufacturer's plant in Neckarsulm July 3, 2013. REUTERS/Michaela Rehle/File Photo

The euro bounced off session lows after the Germany PMI data were released, half an hour before the euro zone data, but later gave up its gains in very thin trading.

What may be particularly encouraging to the ECB is the fact a 12 percent rise in the euro so far this year does not appear to have dented manufacturing. The PMIs also showed the strongest new export orders performance since February 2011.

But services activity dipped to the weakest since the start of the year, along with a slowdown in orders growth.

Business expectations across all industries slipped to their weakest since November. But apart from coming off a recent high in May, there was no reason given by the survey’s compilers for why sentiment had declined.

Price pressures, while subdued, accelerated slightly to the highest since May. Hiring growth slowed slightly in services and manufacturing, but remained solid.

The reaction from analysts was broadly positive.

“Even though service sector growth has been somewhat weaker recently, the fundamentals for continued strength in the second half of 2017 are still there,” said Bert Colijn, senior economist at ING. However, he played down the slight inflation pressure.

“As businesses indicated faster increases in selling prices earlier in the year, this will not convince the ECB that faster price growth is imminent ahead of (ECB President Mario) Draghi’s speech in Jackson Hole on Friday. In fact, we think that improvements in inflation to above 1.5 percent are unlikely for the coming months, so look for a cautious Draghi at the end of the week.”